Incentives to Form Coalitions with Bertrand Competition

TLDR

In quantity‑setting games, mergers are typically disadvantageous. The study examines the incentive to merge among firms producing differentiated products that compete on price. Because price‑game reaction functions are upward sloping, the merger’s initial price increase is reinforced by outsiders, making the merger more profitable. The analysis shows that mergers of any size are beneficial, with larger mergers generating higher profits.

Abstract

In this article we investigate the incentive to merge when firms that produce differentiated products engage in price competition. We demonstrate that mergers of any size are beneficial and are so increasingly: large mergers yield higher profits than smaller ones. This is in contrast to the result that mergers tend to be disadvantageous in quantity-setting games. This qualitative difference follows from the fact that reaction functions are typically upward sloping in price games but downward sloping in quantity games. Thus, the reaction of outsiders reinforces the initial price increase that results from the merger.